RIL's performance likely to remain soft in Q4, Jio expected to come to aid

Rising telecom revenues to partly compensate for muted show of refining, retail & petrochemicals

In a weak demand environment, with the energy sector taking a hit and retail sales getting impacted by the 21-day nationwide lockdown, the performance of Reliance Industries (RIL) is likely to remain soft in the fourth quarter of financial year 2019-20 quarter (Q4FY20).

Analysts estimate that Q4 might be amongst RIL’s weakest in a while, but they expect rising revenues and profits in the telecom business to save the day.

Initial estimates indicate that the largest contributors, the refining and petrochemicals (petchem) businesses, will see significant pressure on profitability with the refining segment’s operating profit (earnings before interest and taxes, or Ebit) declining by 19.6 per cent sequentially, according to Bank of America Merrill Lynch (BofAML). Petchem, which had seen a 23 per cent sequential decline in Ebit in Q3, might put up a similar showing in Q4.  Gross refining margins (GRMs) have trended down. 

 

 

The expected benefit of International Maritime Organization (IMO)’s 2020 Fuel Sulphur Regulation is yet to accrue. Benchmark Singapore GRMs declined 22 per cent sequentially in Q4 with a reduction in margins (cracks) of all products, except for furnace oil and LPG. However, for RIL, the $7-8 per barrel negative impact from lower gasoline and jet fuel margins and shipping costs were offset by $6-7 per barrel discount on crude sourcing, say analysts.

Adjusting for these, Centrum Broking estimates RIL’s GRM to decline by $1.2 a barrel sequentially, while Emkay Global expects GRM at $7.5 versus $9.2 in Q3.  Petchem accounts for 31 per cent of RIL’s earnings and 34 per cent of operating cash flow (OCF) generation. Though margins for most products have been subdued, olefins and PET (two-thirds of RIL’s petchem sales) have seen improvement. However, RIL sells 70 per cent of its produce in domestic markets and hence, lower volumes may weigh on petchem earnings. Lower gas feed stock prices may provide some cushion.

 

 

Retail, which has remained on a strong footing, may also feel the heat of the lockdown. The quarter otherwise also remains weak with majority sales being pushed through discounts. Grocery sales are seen rising, but will likely be offset by softer consumer electronics and fashion & lifestyle sales.
 

The digital services and telecom business should clock good numbers. Morgan Stanley estimates telecom business Ebitda to rise 12 per cent sequentially (43 per cent year-on-year) to Rs 6,250 crore driven by a 22 million increase in subscribers and flattish average revenue per user compared to Q3.  Overall, Morgan estimate RIL’s Q4 earnings to decline 5 per cent sequentially led by potential inventory losses in refining and lower retail sales, while BofAML pegs the sequential decline at 8.1 per cent.